European tech firms tiptoe back to IPO market

FRANKFURT (Reuters) - A handful of European tech firms are testing the appetite for initial public offerings, taking their lead from a modest rebound in listings in the United States following a two-year slump.

According to data from venture market research firm CB Insights, European tech IPOs have been thin on the ground in recent months while venture capital has also crumbled.

The rush last year to mint "unicorns" - firms valued at more than $1 billion – led to a worldwide crash in venture capital funding that is continuing to drag on the creation of new start-ups, especially in Europe, while weighing on stock markets.

The market for new tech listings in Europe retreated from five IPOs in the second quarter of 2015 to just one a quarter later and it has attracted only modest interest since then, with many planned listings being canceled.

While not yet a flood of household names, larger tech firms in Europe are watching the upcoming listings to see if prices hold up enough to justify their own IPOs, rather than letting investors cash out through a merger with a bigger company.

"The market is in a place where quite a few European companies can see IPOs happening at a premium compared to their last investment rounds," said London-based venture investor Alexander Frolov at Target Global.

"The question is whether the situation will continue for a while and whether the market has appetite for further IPOs, or whether prices go back down," he said.

Frolov was an early backer of Germany's Delivery Hero, Takeaway.com's larger rival, which is considered an eventual candidate for a stock market listing.

On Friday, Nets A/S is looking to raise $1.5-$2.5 billion in a deal that could value the Danish firm as much as $4.8 billion. Next week, Takeaway.com is aiming to raise up to 350 million euros for a market value of up to 1.2 billion euros.

Early next month, Telxius, the mobile tower business that Telefonica is spinning off, will be looking for a market value of 3-3.75 billion euros while Shop Apotheke Europe is planning a more modest 100 million euros offering valuing the company at about 300-400 million.

FUNDING GAP

There is a vital interplay between successful IPOs and getting investors to make bigger bets on European tech firms.

Europe remains a hot-bed of very early stage "seed" investments, typically under 1 million euros or pounds, which account for 49 percent of all funding rounds in Europe, far more than in other regions.

But the region lags well behind the United States and Asia in terms of larger investments for companies looking to expand. This is partly due to far lower levels of investment in the region compared to Silicon Valley or keen Asian tech markets.

A run of successful European tech IPOs means venture capitalists could be back with bigger investments in the next generation of bright ideas.

That's not happening yet. Instead, venture funding in Europe fell to $2.8 billion in the second quarter, down 20 percent from the first quarter of the year, according to an analysis of funding trends by KPMG International and CB Insights.

That's just a tenth of the $27.4 billion in global venture capital funding last quarter. North America boasted six times more funding and Asia three times as much as Europe. The availability of capital translates into the size of new tech players emerging in each region (http://tmsnrt.rs/2cRfN0q).

Industry insiders and academic experts say the biggest issue for Europe is the funding gap that exists between firms achieving early success and proven winners with track records and sustained growth prospects that can become global players.

A major hurdle keeping European firms from becoming the world's next Facebook or Alibaba is the far more risk adverse nature of public investors, and a tradition of private market investors selling companies early through merger deals.

THE MERGER DODGE

In the absence of an IPO, the vast majority of European tech company exits end up in the form of trade sales to a larger tech player. In that area, it's not all bad news for Europe relative to other regions. Britain ranks second behind the United States in the number of tech exits in the first half of this year.

While Britain produced only one IPO in the second quarter, it saw 135 tech merger and acquisition deals.

Top recent British deals included the $350 million sale of imaging processing supplier Apical to Softbank-owned chipmaker ARM and Twitter's purchase of another imaging firm, Magic Pony Technologies, for $150 million.

One leading asset manager said a classic British tech success sells out to U.S. or Asian tech giants for about 100-300 million pounds, rather than holding on for more funding and an eventual listing at multi-billion pound valuations.

"The limited number of success stories we have had in the UK have generally sold out too early," Neil Woodford, a top British money manager, told the BBC this week. His firm, Woodford Investment Management, runs nearly 15 billion pounds in funds.

By contrast, there were 429 merger exits for U.S. tech firms during the second quarter and four tech IPOs, including Acacia and Twilio, both of which have more than tripled since public listings in May and June respectively.